The former chief of investor relations for Enron Corp. testified Wednesday that some quarterly earnings estimates in 1999 and 2000 were revised upward to meet analyst expectations. Mark Koenig, the first witness to take the stand in the trial of Enron founder Kenneth Lay and former CEO Jeffrey Skilling, is expected to testify for the next few days.

Koenig, 50, pleaded guilty in 2004 to aiding and abetting securities fraud, and he agreed to cooperate with investigators (see Daily GPI, Aug. 26, 2004). Koenig has not been sentenced, but he faces up to 10 years in prison and $1.49 million in fines. Koenig’s career at Enron lasted almost 17 years, first as a pension and investment manager for InterNorth, the Omaha, NE pipeline company that merged with Houston Natural Gas in 1985 to form Enron. He joined investor relations in 1992, eventually rising to the post of executive vice president.

At Enron, Koenig was responsible for issuing earnings releases and scripts for financial analyst conference calls. He also accompanied Enron executives on public speaking engagements, and he was the first point of contact between the company and financial analysts.

Koenig told Prosecutor Kathy Ruemmler “it was wrong” to change the financial statements. However, Koenig said he did not make the changes on his own.

In testimony Wednesday, Koenig said he first changed the earnings forecast in early 2000 in connection with Enron’s plans to report 4Q1999 earnings. On Jan. 17, 2000, the day before the planned earnings release, Koenig said his office prepared a draft release that showed Enron had earned 30 cents/share for the final quarter of 1999. However, that afternoon, the consensus estimate of analysts was 31 cents/share, he said (see Daily GPI, Jan. 19, 2000).

“I was kind of sick about it,” Koenig testified. “My job was to keep that estimate in line.” He said he worried about missing the estimate even by a penny because of a possible negative effect on the stock price.

Koenig said he talked with Skilling that same day about the earnings. Several hours later, Koenig testified the earnings were adjusted to 31 cents/share, and the release was changed to reflect the adjustment. Koenig said Lay told him the next day that when he had gone to bed the company planned to report 30 cents/share and he had woken up to find the company had reported 31 cents/share.

In a second incident, involving the earnings for 2Q2000, Koenig testified that Enron executives learned Wall Street analysts were forecasting the company would earn 32 cents/share.

“We had a desire at Enron to beat the consensus estimate by 2 cents,” Koenig testified. “We thought it would maintain or increase the stock price.”

In a meeting with Skilling and former Chief Accounting Officer Richard Causey, Koenig said, “We discussed what the earnings were, and there was a determination made to report 34 cents per share.”

Ruemmler asked Koenig whether meeting the consensus estimate or running the company was more important to the top executives. “Meeting the consensus estimate,” he said. Causey had been scheduled to go to trial with Skilling and Lay; however, he pleaded guilty in December (see Daily GPI, Dec. 29, 2005).

In another incident, Koenig testified that revenues reported in 2Q2001 for Enron Broadband Services (EBS) were not actual business transactions but rather were sales of unnecessary infrastructure. Koenig said the numbers were changed to make EBS appear more attractive to investors.

The prosecution played a tape of a July 2001 conference call with investors (see Daily GPI, July 13, 2001). In the tape, Skilling is heard telling analysts EBS was making money selling Internet bandwidth. Skilling told analysts the value of “dark fiber” sales was $50 million. However, Koenig said the sales exceeded $150 million and represented “virtually all” of the revenues for the quarter. Dark fiber is unused fiber optic cable.

Koenig testified, “I was going along with the same disclosure, the incorrect disclosure, to minimize the contribution from dark fiber sales, to not let out to the market” that “virtually all of it” was from dark fiber sales.

Lay and Skilling also regularly attended weekly meetings to discuss financial details of Enron, said Koenig, and Lay was aware of any changes to the financial estimates, which were made only hours before quarterly earnings were to be released. Koenig testified that Skilling was the executive who had the authority to alter the figures. Newspaper articles from The Wall Street Journal and Houston Chronicle were entered into evidence, showing how well the altered earnings estimates were received by the stock market.

Lay and Skilling both sought to exclude from company meetings financial analysts who were critical of Enron, according to Koenig. He said Lay asked him if the company had to continue to invite analyst John Olson, who now co-manages the Houston Energy Partners equities hedge fund. In the late 1990s and into 2001, Olson was working for Merrill Lynch covering Enron, and he frequently challenged the company’s accounting methods.

After a February 2001 analyst meeting, Koenig said, Lay expressed his concerns about Olson, asking if Olson needed to be invited to future meetings. Skilling also asked whether Olson had to be invited to the meetings. Koenig told both Lay and Skilling that Olson had to be invited to attend the meetings since he covered the company for Merrill Lynch.

“He [Olson] was one of the few who went out on a limb in probing and had a negative opinion about the company,” Koenig testified.

Olson continued to come to the meetings until he was later fired by Merrill Lynch. Olson has said it was Lay who pressured his former bosses because of his reviews of Enron (see Daily GPI, Aug. 15, 2002).

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